CED in NChttps://ced.sog.unc.edu
A UNC School of Government BlogThu, 15 Feb 2018 16:50:50 +0000en-UShourly1https://wordpress.org/?v=4.9.4On Borrowed Ground: A Ground Lease Primer – Part 1https://ced.sog.unc.edu/on-borrowed-ground-a-ground-lease-primer-part-1/
https://ced.sog.unc.edu/on-borrowed-ground-a-ground-lease-primer-part-1/#respondThu, 15 Feb 2018 16:50:50 +0000http://ced.sog.unc.edu/?p=6337Imagine that you find the ideal land parcel to develop, but the owner does not want to sell – and desires to retain ownership in any future land appreciation. Or, you find the perfect development site that offers superior investment returns – but the land cost is prohibitively expensive, and makes your project infeasible.

In both scenarios, development is still possible by embracing a ground lease.

A ground lease is a lease for the land between a lessee, such as a developer, tenant, or asset manager, and the owner of the land. The owner, the lessor, provides rights to the lessee to develop his/her land while retaining ownership of the land. Meanwhile, the lessee retains ownership of the structures built upon the land. Both parties agree to the nature of development, land use, and the financial terms of the lease.

Ground leases are more common in densely developed areas, such as New York City, or in prime locations and intersections, such as small parcels on the corner of two major roadways ideal for a retail ‘pad’ site. However, ground leases do occur in many other instances, such as with land owned by a major institution.

They are, though, more unusual outside of these circumstances due to the substantial legal costs and due diligence of preparing a ground lease and financing issues surrounding ground leases.

Basic Structure

A ground lease can be structured in various ways, but among the most important terms of the ground lease include the rental rate, duration, and reset provisions, which will be explored in a future blog post (Part 2 of this series).

Rent

The rental rate is based upon the market value of the land. For example, if a parcel is valued at $5 million, and the rental rate is 5%, then the lessee would pay the property owner $250,000 per year. However, the precise rate is more difficult to determine, and requires market comparable data in order to determine a ‘fair market’ rate. This can be problematic in situations where contract terms need to be kept confidential, or a ground lease occurs in a market where such transactions are not common.

Duration

In order to give the property owner stable income over many years, the ground lease is usually structured for a long period of time. The result is that the property owner effectively possesses an annuity-like product: a series of recurring cash payments over a fixed number of years. For example, a ground lease between a REIT and private landowner for a 20-story commercial building in Manhattan may terminate after 50 years, while a ground lease between a city housing authority and multifamily developer may last 99 years.

Ultimately, the duration of the lease depends upon the financial goals of the property owner. The ground lease term may include various renewal options. For example, a 50-year ground lease may include an initial 20-year term, with two 15-year renewal options. However, the term of the ground lease should match the expected economic lifespan of the project, location, and product type. A 60-story commercial office building in a central business district will have a longer economic lifespan than a four-story suburban office building or stick-built Class A multifamily apartment building.

Having a long duration ground lease for a project that has a limited economic lifespan, or cannot be adapted for an additional use, does not provide economic value to neither the property owner or lessee. Furthermore, lenders would not be willing to finance a project that has relatively short ground lease terms since loan repayment would be at risk.

There’s more to know about ground leases; stayed tuned for Part 2 of this series.

John Raymond is a MBA candidate at the Kenan-Flagler Business School at UNC-Chapel Hill. He is also a Fellow with the Development Finance Initiative.

]]>https://ced.sog.unc.edu/on-borrowed-ground-a-ground-lease-primer-part-1/feed/0Revolving Loan Funds for Affordable Housinghttps://ced.sog.unc.edu/revolving-loan-funds-for-affordable-housing/
https://ced.sog.unc.edu/revolving-loan-funds-for-affordable-housing/#respondThu, 08 Feb 2018 17:35:01 +0000http://ced.sog.unc.edu/?p=6331In previous CED posts, the definition and benefits and disadvantages of a revolving loan fund structure have been described. For review purposes, a revolving loan fund is often defined as a replenishing source of capital or funding from which loans are made. Some of these same posts describe this financing tool is as way to provide a boost for small business owners in rural regions and provide an example of the revolving loan fund run by Kerr-Tar Council of Governments in Vance County. In addition to encouraging and supporting small businesses, revolving loan funds have been used to address and fund other charges facing local governments. One such charge? Affordable Housing. In places like Denver, Colorado, Santa Barbara, California and Arlington County, Virginia, revolving loan funds have served as a huge source of financing for affordable housing development. In North Carolina, local governments have ample authority to expend funds in support of affordable housing for low and moderate income persons; a revolving loan fund may be a useful framework to deploy funding.

In 2015 in Denver, Colorado, a $10 million revolving loan fund was launched in order to address the city’s crisis of available housing. In 2015 there was a shortage of 26,000 affordable rental units. The RLF was started to support the development of multi-family rental units for individuals and families that earn up to 60% of the area median income (AMI). The Denver Office of Economic Development stated that the fund will initially provide loans for six to seven apartment projects totaling 800 to 1,000 units. The first of these seven developments – Northfield Apartments – provided 84 income-restricted units and opened in November 2016.

The Santa Barbara Housing Trust Fund (HTF) operates a $6.5 million dollar RLF launched in 2005 in partnership with community lenders to provide more low-cost loans to organizations seeking to develop affordable rental or homeownership projects. The RLF supports both urban infill and rural sites that have at least 25% of the units set to serve households earning between 0-120% AMI. The loan funds can be used for site acquisition, predevelopment costs, project construction, bridge financing, tax-credit projects, and permanent financing. In 2014 the Santa Barbara HTF provided a $750,000 construction loan for a 12-unit Habitat development. In 2015 the RLF was used to provide $430,000 in construction and permanent financing for a 43-unit development done by Peoples’ Self-Help Housing. In addition to assisting with financing of these affordable housing developments, the RLF also has the added benefit of coming with technical assistance for community groups interested in a potential project as well.

In Arlington County, Virginia, The Affordable Housing Investment Fund (AHIF) is the county’s main financing program for affordable housing development. This revolving loan fund was created in 1988, and it provides low-interest loans for new construction, acquisition, and rehabilitation of affordable housing. Since its inception, AHIF has originated more than $274 million in loans for affordable units. Once such development is the 116 unit Views from Clarendon development. AHIF provided a $13.1 million dollar loan for the affordable housing portion of the project. Seventy of the units are leased to individuals and families with incomes ranging from $35,000 to $50,000 per year, and in 2012 was named “Best Affordable Housing Development” at the Governor’s Housing Conference.

Stephanie Watkins-Cruz is a dual-degree student in the Master of Public Administration and Master of City & Regional Planning programs at UNC-Chapel Hill and a Community Revitalization Fellow with the Development Finance Initiative.

]]>https://ced.sog.unc.edu/revolving-loan-funds-for-affordable-housing/feed/0What @sog_ced is reading online: January 2018https://ced.sog.unc.edu/what-sog_ced-is-reading-online-january-2018/
https://ced.sog.unc.edu/what-sog_ced-is-reading-online-january-2018/#respondThu, 01 Feb 2018 15:15:21 +0000http://ced.sog.unc.edu/?p=6330The following are articles and reports on the web that the Community and Economic Development Program at the UNC School of Government shared through social media over the past month. Follow us on twitter or facebook to receive regular updates.

Report from the Information Technology & Innovation Foundation (ITIF) finds that North Carolina leads all states in industry support of university research (12.1%), generating economic development benefits: http://bit.ly/2Dq0JGE

Bloomberg.com reports on High Point, North Carolina’s taxable bonds to construct a publicly-owned minor league baseball stadium in a bid to attract private investment to revitalize downtown: https://bloom.bg/2BamftD

The North Carolina Center for Public Policy Research evaluates the connection between teacher retention and affordable housing. http://bit.ly/2DxlkcY

Will the North Carolina General Assembly modify the county “Development Tier” designations at the heart of many State funding formulas? http://bit.ly/2Fza8ZY

Other CED items:

HUD (Department of Housing and Urban Development) delays the fair housing rule until 2020 and will stop reviewing fair housing plans to address racial segregation. HUD says local governments need more time to adjust to the rule: http://reut.rs/2lXmfrs

The New York Times’ The Upshot argues that NIMBY has evolved into “Not In My Neighborhood” as owners and even renters try to control variables that they perceive (rightly or wrongly) affect their property values. http://nyti.ms/2CGwV8g

Small grocer locates in low-income food deserts throughout the country, including South Carolina, backed by a group of military veterans on a mission to bring affordable full-service grocery stores to underserved low-income areas. http://bit.ly/2ATbdJi

Excellent case study of the attempted merger of five nonprofit housing organizations in western New York – benefits & challenges, rural & urban: http://bit.ly/2Dm9VvD

New York Times explains how the tax overhaul will result in lower production of affordable housing for those full time workers earning 60% of area median income; and the amount of “naturally occurring affordable housing” is falling too. http://nyti.ms/2EVCLA4

Tax law included a new tool for community development: qualified investments in “Opportunity Zones,” which are distressed areas that must be designated by governor, get tax benefits such as deferral of taxes on gains and stepped-up basis. http://bit.ly/2rS3DiD

]]>https://ced.sog.unc.edu/what-sog_ced-is-reading-online-january-2018/feed/0The Importance of “Good” Datahttps://ced.sog.unc.edu/the-importance-of-good-data/
https://ced.sog.unc.edu/the-importance-of-good-data/#respondThu, 25 Jan 2018 14:50:25 +0000http://ced.sog.unc.edu/?p=6323The Development Finance Initiative’s Community Revitalization Fellows represent students from a variety of graduate programs: City and Regional Planning, Business, Public Administration, Information and Library Science, Applied Geography, and Public Health. In addition to working as DFI Fellows, these students have something else in common: their respective graduate programs all require that they take at least one course focused on statistics and data analysis. No exceptions.

Why is this requirement so important? Because decision making in the modern world is based on data. Statistical analysis offers the most objective, informed way to analyze a situation and project the impact of different courses of action.

This is certainly true for community economic development. Decision makers in both the public and private sectors rely on data to make decisions. Businesses leverage numbers from the Federal, State, and local government agencies, to decide where to invest their resources. From simple population facts to more sophisticated surveys of household expenditures, data is the best way for companies to forecast revenues and costs under several circumstances. These projections ultimately drive all major business decisions.

Similarly, government agencies and public leaders utilize data to inform public policy. State and Federal governments often allocate resources according to the population or economic statistics. Regulations and laws dealing with economic development are analyzed using a cost-benefit analyses, which also draw on data. At every level, economic development decisions are driven by numbers.

Good data and statistical information helps public and private decision makers to invest in a particular project by shedding light on the project’s likelihood for success.

The Danger of Data

While statistical analysis is central to decision making, one should be mindful of the quality and source of the data, as well as the analytical process utilized. Computer scientists refer to this dilemma as “garbage-in, garbage-out”. If one has bad data – inaccurate, flawed, incomplete or misleading statistics – then the result of a statistical analysis will be wrong. No matter how good one’s econometric model, machine learning algorithm, or decision-making process, there is no substitute for good data.

In fact, bad data is worse than no data at all. At least with no data, a decision maker is aware of his or her ignorance. With bad data, a decision maker is tempted to confidently choose the wrong option.

For example, imagine two people are in a car on the way to a new place:

If they have good data, then they will confidently turn right to get to their destination.

If they have no data, then they know they are lost and knows to ask for directions or be extra careful to look for signals they are on the right way.

However, if they have bad data, then the driver will confidently turn left. They will be heading in the wrong direction, completely ignorant of their mistake.

Good Data Habits

Fear of bad data should not (and will not) stop decision makers from using numbers to inform decisions. Local governments and those involved in community economic development should instead focus on collecting accurate and representative information. When there are potential errors or limitations in the data, these factors should be clearly noted.

Communities with large minority or transient populations (like students or migrant workers) should be particularly cognizant of the quality of their data. These groups are more challenging to survey, and thus are less likely to respond to surveys or be included in data sets.

Similarly, businesses may consider investments in rural communities to be riskier, since there are less potential customers and workers. Thus, these communities often need to present even more statistical information to provide a business case that will convince investors.

A good place for local governments to start collecting better data is in their geographic information systems (GIS) data sets. This publicly available information is used by businesses to determine when they locate stores, factories, and other buildings. Town and urban planners use the same data sets to plan new roads or investments in other infrastructure.

Investing in a data may seem like an indirect way to promote economic development. However, decisions in the modern world are make with data. Communities that fail to recognize and leverage this reality may fall behind those they choose to utilize good data and analysis for decision making.

Bradley Harris is a Masters student at Duke’s Sanford School of Public Policy as well as an MBA Candidate at the UNC-Chapel Hill Kenan Flagler Business School. Bradley is also currently a Community Revitalization Fellow with the Development Finance Initiative.

]]>https://ced.sog.unc.edu/the-importance-of-good-data/feed/0The CDFI Bond Guarantee Programhttps://ced.sog.unc.edu/the-cdfi-bond-guarantee-program/
https://ced.sog.unc.edu/the-cdfi-bond-guarantee-program/#respondThu, 18 Jan 2018 16:05:43 +0000http://ced.sog.unc.edu/?p=6320It is no secret that the struggle to preserve affordable housing and increase economic growth is more challenging than ever. Subsidies are growing smaller and building costs are increasing, making affordable housing more difficult to develop. However, a federal program known as the Community Development Financial Institution (CDFI) Bond Guarantee Program (BGP) is making it possible for CDFIs across the nation to invest in the distressed communities of the United States.

The CDFI Bond Guarantee Program was created by the U.S. Treasury’s CDFI Fund through the Small Business Jobs Act of 2010. The program was designed to provide long-term, low-cost capital for community revitalization and economic growth. Through this program, federally certified Qualifed Issuers (CDFIs or approved designees) are eligible to apply to the CDFI Fund for the authorization to issue bonds worth a minimum of $100 million total. These bonds are guaranteed 100% by the U.S. Treasury, up to $1 billion per year. The proceeds from these bonds can be used to extend credit for community development purposes or to refinance existing obligations.

The way the program works is by Qualified Issuers selling their government-backed bonds to the Federal Financing Bank (FFB), which is a government corporation that provides financing to help federal agencies manage their borrowing and lending programs. Each bond provides capital with a maximum maturity rate of 30 years. Currently, the CDFI Bond Guarantee Program is the only source of long-term, fixed-rate capital available for community development. Additionally, as a federal credit subsidy program that does not offer grants or direct loans, the bonds are essentially debt that must be repaid. This allows the program function at no cost to taxpayers.

Since its inception, approximately fifteen Qualified Issuers have leveraged the CDFI Bond Guarantee Program to access capital. The Opportunity Finance Network (OFN) is the largest national network of CDFIs. Through the CDFI Bond Guarantee Program, in 2013 OFN issued the first CDFI Bond composed of a $100 million bond on behalf of Clearinghouse CDFI to provide community development financing in California and Nevada. The Community Development Trust (CDT) is another example as a CDFI that has affordable housing projects in over 40 states, including North Carolina. CDT used capital from the CDFI Bond Guarantee Program for 14 of their affordable housing deals, providing the capital to local and statewide multifamily housing developers for the repair and upkeep of affordable housing units.

Though the program has been instrumental in terms of providing federal bonds to CDFIs, it has also been a stepping stone for CDFIs in accessing private capital. In 2017, two CDFIs, the Local Initiatives Support Corporation (LISC) and Reinvestment Fund made bond offerings in the private market by getting Standard and Poor’s (S&P) rated. S&P is one of the three major credit rating agencies in America used to determine the creditworthiness. LISC raised $100 million in the very first public offering of a CDFI bond with Reinvestment Fund raising $50 million in its bond offering. Both CDFIs received more bids for bonds than they were selling. Currently, five CDFIs have gotten their S&P rating, including Capital Impact Partners, Housing Trust Silicon Valley, and Clearinghouse CDFI. Each of these CDFIs have high ratings that indicate them as low-risk investments and have enabled these organizations to access private capital through the bond market.

As other funding sources grow scarcer, the CDFI Bond Guarantee Program has opened the door for CDFIs to access other capital sources for community development. While S&P ratings can be expensive and time-consuming to obtain, the CDFIs that have already received their ratings showcase the opportunity that bond markets can provide as a new source of capital to be deployed in the communities that need it most.

Ashley Tucker is a dual-degree student in the Master of Public Administration and Master of City & Regional Planning programs at UNC-Chapel Hill and a Fellow with the Development Finance Initiative.